This blog covers financial, political and other topics the author gets the urge to write about. It does not provide personal financial, legal or other advice. Consider consulting a personal professional adviser before making any decisions. Copyright (c) 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 by Leonard W. Wang. All rights reserved.

Tuesday, October 21, 2008

Why the Stock Market Hasn't Bottomed Out Yet

Today, the stock market rose about 4% on news of a possible second government stimulus package and indications that the credit freeze is thawing as a result of various central bank interventions. Among other things, the Dow Jones Industrial Average briskly rose 411 points. This is a perfect example of the state of today's stock market. The market rises only when governmental action is promised or taken. All other news seems to make the market droop or drop. The market has become all government, all the time.

That's why stocks haven't hit bottom. Economic and other nongovernmental forces would push them lower, but government intervention props them up, at least momentarily. Ultimately, all the governments in the world can't fight the market. Economic and financial realities will overcome government policies. Look at the histories of the Soviet Union and People's Republic of China for examples.

With a presidential election campaign in full swing, Pennsylvania Avenue has supplanted Wall Street as the center of the world financial system, and will continue to dominate for a while. But you can't legislate away the business cycle (nor can Wall Street's overly confident financial engineers eliminate it). As we've discussed in our two preceding blogs, the government has focused almost obsessively on the financial crisis and isn't doing enough to resuscitate the real economy. That will be costly down line, when we need economic recovery to complete the revival of the financial system. Don't pin too much hope on a second stimulus package. The first one, the tax rebate paid earlier this year, did little except briefly delay the economy's slide into recession. There's little reason to think that a second bite at the apple will be much different. With the real economy still headed downward, the stock market will have little choice but to follow. Expect turbulent waters in the financial markets for a while.

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